In common with every other business and financial-related entity, single family offices in Europe were shaken up by the economic instability of 2008, according to the second annual Merrill Lynch/Campden Research European Single Family Office Survey. For the majority, this was the first time SFOs had to negotiate such a tumultuous period and both attitudes and practices underwent some form of revaluation.
Investment strategies were changed, with a move from equities to cash the most marked trend. Managing risk, finding appropriate staff, reducing costs and increased scrutiny from the family were also key points of discussion. The year and the challenges it brought were almost without precedent in the modern era yet European SFOs remain upbeat as they look towards the future.
The year of mistrust
SFOs were not spared the pain of extreme losses caused by the global financial turmoil. When asked, out of a number of factors, which was the most worrying for their organisation given the current economic climate, 48 per cent said they were most concerned about their asset protection options. With mainstay asset classes such as equities and bonds largely providing sub-par returns in 2008, 35 per cent said that the current lack of viable investment options was the most worrying aspect of the present economic climate.
However, it wasn't all bad news, as one SFO based in the UK reveals. "The credit crunch has actually afforded us the perfect opportunity to transfer our assets into more tax-effective funds. It drew attention to a number of inefficient vehicles we were using and gave us a reason to change them."
The vast majority (65 per cent) have changed their investment strategies as a direct result of the market turmoil, while relationships with counterparties have been affected in 67 per cent of cases. Nevertheless, SFOs in Europe remain upbeat about their long-term future, on the whole believing that the present crises can be survived.
"Recent events have highlighted the reasons why families set up on their own in the first place," said one Scandinavian SFO. "However, if you do not handle your family's assets correctly in these conditions, they may just wonder if it is worth having a family office at all." Interestingly, the majority (74 per cent) had not changed the way in which they handle risk management. This has quite possibly changed given the survey was conducted last autumn, although several respondents revealed they had not had as many nasty surprises as other financial entities.
Finding staff with the "right fit" for a European SFO continued to be a problem in 2008. When rating critical success factors for attracting and recruiting senior staff, an attractive working environment was ranked top by survey respondents for the second year in a row. However, unlike last year, when job stability was the second most important factor, performance/incentive bonus was ranked second.
Here to serve
Unsurprisingly, the most important goal for SFOs surveyed was the preservation of family wealth, followed closely by the growth of wealth. With many SFOs primarily set up for wealth management activities with the express purpose of controlling and consolidating family wealth, investment and asset management continues to be the dominant focus. However, the resounding message from this year's survey was a desire for greater knowledge internally about these subjects.
The debate surrounding the future of concierge services in the family office space continues. Many SFOs believe that the concierge service has had its day, whereas supporters of these types of services believe they remain an important contributor to family unity. In this year's survey respondents saw an overall increase in concierge services offered (62 per cent of respondents compared to 55 per cent in 2007).
When the purpose of setting up an SFO is to gain independence from financial institutions and provide a completely bespoke service to the family, it is little wonder that a majority of those services deemed central to the family will be executed in-house rather than be outsourced. However, market and time constraints being what they are, many family offices find outsourcing becomes a real necessity.
The idea of outsourcing asset management completely was looked on unfavourably by many, especially in light of the economic events of 2008. As highlighted in last year's survey, the preference for using in-house rather than external resources for investment-related services is largely reversed in the provision of financial advisory services. Half the SFOs surveyed outsource all the legal services they provide, with another 28 per cent outsourcing some of the legal services they provide.
The challenges of 2008 led many SFOs to look inwardly at their own systems and processes. One area in need of change was risk management systems. Fifteen per cent of all respondents said that risk management will be the most important service over the next three years.
Over 60 per cent of the family offices described the family's investment objective as either "balanced" or to "preserve", and a further 20 per cent described it as "preserve very conservatively". This was in sharp contrast with last year's results, when 57 per cent described their approach as "balanced" and only four per cent described their approach as "preserve very conservatively".
"We are seriously debating the whole idea of asset classes," admitted one Swiss-based SFO. "Are we looking at asset classes the right way? They need to be more than just different coloured buckets of risk. They need to have true meaning."
The average portfolio for all SFOs participating in the survey has about a 55/45 split between traditional and alternative investments. This was in direct contrast to last year's survey where the split was essentially the exact opposite. The most significant change was the move towards cash (up to 26 per cent of the average portfolio), while there was also a large shift away from equities, down to 18 per cent of the average portfolio. Amid falling real estate values, the smallest and the largest SFOs increased their real estate holdings, whilst mid-range SFOs significantly reduced their property portfolios.
It has taken an enormous event, like the credit crunch and the resulting market turmoil, to make SFOs withdraw from so many asset classes and transfer their holdings into cash. In the next three years, however, SFOs believe their levels of investment in equities will return to pre-economic downturn levels of around 34 per cent. They also believe that they will no longer be holding the same levels of cash or equivalent by 2011.
Co-investing, direct capital investments and fund of hedge funds will also see an upsurge in interest from the SFO sphere.
Costs of running a SFO
For the second year running, the average cost across all family offices surveyed was just above 60 basis points (63bp in 2008 versus 62bp in 2007). Smaller SFOs (those with AUM under €250m) on average cost around 87bp to run, while those offices at the large end (more than €1bn) cost approximately 41bp to run.
On average, investment related services cost 58bp compared to 30bp for the next closest services – administration. Family professional services, such as concierge, family event management, and private services for family members, cost 77.5bp for the average SFO. The average optimal cost benchmark expressed by SFOs surveyed was 51bp.
When asked what percentage of costs would be spent on outsourcing in three years time, the number who said "less than 10 per cent" increased to 29 per cent of the sample size. Significantly, however, almost 15 per cent still claim that outsourcing is more than 75 per cent of their total costs and these family offices do not seem intent on lowering their
outsourced cost base.
One manager, who had worked at two very different types of family offices said: "SFOs are all over the place in terms of size and services. But one thing is certain, for the first time in their history, many are making a serious attempt to be simpler and leaner. And that's true whether they are large or small."
Relationships with financial service providers
These were pushed to the limit in 2008 as SFOs became less tolerant than they were in the past. The majority (57 per cent) said private banks were one of their main services providers, a significant increase from the 36 per cent who named private banks last year. The only other category of service provider to record an increase from last year's results were brokers, up from 11 per cent to 30 per cent. Asset managers, who last year were seen by 75 per cent of respondents as a main service provider, dropped to 52 per cent.
"With the markets in flux and household names under the microscope, transparency became key this year," said one Dutch SFO. "Those service providers that couldn't show transparency were cropped. No excuses."
Echoing this, the "performance, performance, performance" mantra is no longer good enough for SFOs, according to the majority of respondents. The most important criteria for selecting a service provider in 2008 were "confidentiality" and "reputation". "Timely advice" was considered by 41 per cent of respondents as the most highly prized quality that banks could possess, followed by "professionalism".
With equity markets out of favour for many family offices and an appetite for new and interesting alternative avenues for investment opportunities, this year's survey has found a keen interest in co-investment as an alternative to traditional forms of investment. Most SFOs have at one time taken up co-investment opportunities. A quarter of SFOs have never taken up a co-investment opportunity with another family office, but 67 per cent of them engage in co-investment with other family offices "occasionally" and eight per cent "frequently".
Against the backdrop of market turmoil, governance came into increasing focus in 2008. Many of the respondents this year remarked they had come under much tougher scrutiny from the families they served. Further, in direct response to market conditions and the demise of a few high profile financial institutions, many SFOs have increased the level of attention they pay to their own financial service providers.
The vast majority of SFOs have formal structures and procedures for managing aspects of the family office business and report back to family members, the most popular being the owner's committee and the investment committee. Family members comprise the majority membership of owners, investment and management committees.
How frequently SFOs communicate with their families varies but there is a prevalence for either monthly or quarterly communications, used by 44 per cent and 22 per cent respectively. For the vast majority (62 per cent), the common way to communicate with their family is through formal presentations.
The value of informal communication was again acknowledged this year by many family offices, with most stating that while they communicate officially on investment matters quarterly or monthly, they communicate informally weekly or daily.
We see communication as a vital way of illustrating our worth to the family," said the chief executive of one Spanish SFO.
"There are key family members that we need to be in touch with daily. We see the formal reports as a service to the family as a whole but for the principals, these reports will never hold any surprises."
The cost of reporting was extremely varied. It is interesting to note that only a small number of those surveyed were able to confidently provide an idea of how much the process of reporting cost them. For those that could (roughly a sixth), reporting cost the firm approximately 2.5 days a month. The monetary cost of reporting was revealed by some firms to be around €10,000 annually at the lower end and up to €150,000 at the top end, with an average yearly cost of just over €50,000.
The way that decisions are made varies from SFO to SFO but by and large, a consensus of a majority of committee members seems the norm for most committees. The only exception to this rule seems to be the owners' committee, where in 55 per cent of the cases, decision-making is left to family members on the committee rather than non-family members. In fact, very rarely are family members or a total consensus not involved in the decision-making.